President Barack Obama has signaled opposition to “Buy American” provisions in economic stimulus legislation now before Congress, a decision that could put him on a collision course with congressional Democrats and labor unions.

Both the $819 billion stimulus bill passed by the House last week and the Senate version being debated now, which has an estimated price tag of more than $900 billion, would require that infrastructure projects carried out under the program use U.S.-made iron and steel. The current version of the Senate bill would go further, requiring that all manufactured goods used in the projects be U.S.-made.

The argument for the “Buy American” provisions seems simple and, at a time of major job losses in the United States, compelling.

“If we want to put people back on payrolls to try to put this country back on track. ... the way to do that, with the hundreds of billions of dollars that are in this bill, is to say, at least try to buy things that are made in America,” Sen. Byron Dorgan, D-N.D., the chief advocate of the Buy American provision in the Senate bill, said in a speech on the floor last week.

“That is not unfair. It is not selfish,” Dorgan said. “It is the right thing to do."

Buy American provisions are supported by many congressional Democrats and trade unions as well as some industries, notably American steel manufacturers. Opponents include many key Republican lawmakers, U.S. industries that rely heavily on exports and major U.S. trade partners.

Late Wednesday, the Senate softened the provision requiring that only U.S.-made iron or steel used in construction projects paid for in the bill. A move by Sen. John McCain, R-Ariz., to delete the requirement failed, 31-65. But the requirement was changed to specify that U.S. international trade agreements not to be violated.

'A potential source of trade wars'
But Obama signaled in an interview Tuesday that he may seek to have the Buy American requirements deleted before the legislation reaches his desk.

Asked by ABC News anchor Charles Gibson about the provision, Obama replied, “I don’t want provisions that are going to be a violation of World Trade Organization agreements or in other ways signal protectionism. I think that would be a mistake right now. That is a potential source of trade wars that we can't afford at a time when trade is sinking all across the globe.”

Dorgan reacted to Obama's statement Wednesday, saying, "I have said all along that I am not interested in starting a trade war, and the Buy American provisions in the economic recovery bill would not do that.

"I am working with the White House and other Senate colleagues to ensure the Buy American provision is crafted in a way that would not violate our international trade agreements."

The Senate Wednesday was debating and voting on amendments to the the stimulus bill, but it was not clear whether an amendment will be offered to eliminate the Buy American provision.

Economists Gary Clyde Hufbauer and Jeffrey Schott of the Peterson Institute for International Economics, a Washington think tank, said in a study released Tuesday said that the WTO Agreement on Government Procurement does in fact prohibit the Buy American requirement. The institute generally favors measures to promote international trade.

Bills provide some leeway
Both the House and Senate bills allow the Buy American requirements to be waived if the head of the federal department supervising the construction project determines it would be “inconsistent with the public interest” to force states and local governments to use only U.S.-made products.

The bills also allow project managers to opt out if using U.S. products would increase the cost of the infrastructure project by more than 25 percent.

In their study, Hufbauer and Schott estimated that the House bill would increase employment in the U.S. steel industry by about 1,000 jobs, while the Senate bill would increase employment by about 9,000 jobs.

Job gains offset by losses?But the economists estimate that those gains could be more than offset by American job losses if U.S. trading partners such as Canada and Japan respond by imposing their own protectionist measures. Their estimate of jobs lost under that scenario ranges from 6,500 to 65,000, depending on how strongly U.S. trading partners react.

Buy American requirements are not new. Federally funded highway and bridge construction projects, for example, have had a Buy American provision since 1982.

Most Buy American provisions in state or federal law operate through price preferences. By adding a percentage, 20 percent for example, to foreign bids on government construction projects, they make many lower-cost foreign bids less competitive.

But the Buy American provisions in House and Senate bills are absolute: They ban use of foreign-made goods.

Another difference between the Buy American provision in the stimulus bills and the previous ones is size: “What’s different here is it’s a massive federal project of unprecedented size,” said Schott, the Peterson Institute economist, referring to the $142 billion in infrastructure spending in the Senate version of the stimulus bill.

He said that foreign governments give preference to their own firms and contractors when funding infrastructure projects, just as the federal government and state governments do in the United States. “But this augments this existing scope of Buy American procurement at a time of great global economic stress,” Schott said. “Why risk significant disruption or complication to our efforts to work with foreign governments on the global economic crisis?”

The Financial Times reported Wednesday that Japanese Prime Minister Taro Aso, in a speech in the Japanese Diet, condemned the provisions as a violation of international trade rules.

Track President Barack Obama's promisesEuropean Union officials also said that the trade bloc would likely file a complaint with the WTO if the final legislation contains language strongly favoring U.S. suppliers, the Wall Street Journal reported Wednesday.

The controversy is also pitting American steel manufacturers against export-oriented U.S. businesses, such as the construction equipment manufacturer Caterpillar, which fear that foreign governments will retaliate by shutting U.S. companies out of their own infrastructure projects.

Bill Lane, the Washington director for government affairs for Caterpillar, said that 63 percent of the company’s sales were outside the United States in 2007. While Caterpillar stands to be one of the chief beneficiaries of increased spending on infrastructure projects in the United States, it also hopes to benefit from governmental infrastructure projects in China, Southeast Asia, India and Europe as those nations boost spending to combat the global recession.

Those foreign contracts for Caterpillar could be jeopardized if the United States launches a round of protectionist policies across the globe, said Lane.

“If the United States embraces a turn inward, other countries will clearly follow suit," he said. "Our ability to export to other countries will be severely limited.”

“In the 1930s, the United States and the other nations of the world embraced a policy of turning inward — with catastrophic consequences for the U.S. economy,” Lane said. “We could be at a similar point right now.”